Concept of LLP:

Limited Liability Partnership enterprise, the world wide recognized form of business organization, has now been introduced in India by enacting the Limited Liability Partnership Act, 2008. LLP Act was notified on 31.03.2009.

A Limited Liability Partnership, popularly known as LLP combines the advantages of both the Company and Partnership into a single form of organization. Limited Liability Partnership (LLP) is a new corporate form that enables professional knowledge and entrepreneurial skill to combine, organize and operate in an innovative and proficient manner.

It provides an alternative to the traditional partnership firm with unlimited liability. By incorporating an LLP, its members can avail the benefit of limited liability and the flexibility of organizing their internal management on the basis of a mutually-arrived agreement, as is the case in a partnership firm.

Characteristics of an LLP:

1. LLP is governed by the Limited Liability Partnership Act 2008, which has come into force with effect from April 1, 2009. The Indian Partnership Act, 1932 is not applicable to LLP.

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2. LLP is a body incorporate and a legal entity separate from its partners having perpetual succession, can own assets in its name, sue and be sued.

3. The partners have the right to manage the business directly, unlike corporate shareholders.

4. One partner is not responsible or liable for another partner’s, misconduct or negligence.

5. Minimum of 2 partners and no maximum limit.

6. Should be ‘for profit’ business.

7. The rights and duties of partners in an LLP, will be governed by the agreement between partners and the partners have the flexibility to devise the agreement as per their choice. The duties and obligations of Designated Partners shall be as provided in the law. 8. Limited liability of the partners to the extent of their contributions in the LLP. No exposure of personal assets of the partner, except in cases of fraud.

9. LLP shall maintain annual accounts. However, audit of the accounts is required only if the contribution exceeds Rs. 25 lakh or annual turnover exceeds Rs. 40 lakh. A statement of accounts and solvency shall be filed by every LLP with the Registrar of Companies (ROC) every year.

How an LLP is formed?

For forming an LLP, some of the important steps and matters are given below:

Partner:

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There should be at least 2 persons (natural or artificial) to form an LLP. In case any Body Corporate is a partner, then he will be required to nominate any person (natural) as its nominee for the purpose of the LLP. Following entities and/or persons can become a partner in the LLP:

(a) Company incorporated in and outside India

(b) LLP incorporated in and outside India

(c) Individuals resident in and outside India.

Process of Formulation of LLP:

Capital Contribution:

In case of LLP, there is no concept of any share capital, but every partner is required to contribute towards the LLP in some manner as specified in LLP agreement. The said contribution can be tangible, movable or immovable or intangible property or other benefit to the limited liability partnership, including money, promissory notes, and other agreements to contribute cash or property, and contracts for services performed or to be performed.

In case the contribution is in intangible form, the value of the same shall be certified by a practising Chartered Accountant or by a practising Cost Accountant or by approved value from the panel maintained by the Central Government. The monetary value of contribution of each partner shall be accounted for and disclosed in the accounts of the limited liability partnership in the manner as may be prescribed.

Designated Partners:

Every limited liability partnership shall have at least two designated partners to do all acts under the law who are individuals and at least one of them shall be a resident in India. ‘Designated Partner’ means a partner who is designated as such in the incorporation documents or who becomes a designated partner by and in accordance with the LLP Agreement.

In case of a limited liability partnership in which all the partners are bodies corporate or in which one or more partners are individuals and bodies corporate, at least two individuals who are partners of such limited liability partnership or nominees of such bodies corporate shall act as designated partners.

Designated Partner Identification Number (DPIN):

Every Designated Partner is required to obtain a DPIN from the Central Government. DPIN is an eight digit numeric number allotted by the Central Government in order to identify a particular partner and can be obtained by making an online application in Form 7 to Central Government and submitting the physical application along with necessary identity and Address proof of the person applying with prescribed fees.

However, if an individual already holds a DIN (Director Identification Number), the same number could be allotted as your DPIN also. For that the users while submitting Form 7 needs to fill their existing DIN No. in the application.

It is not necessary to apply Designated Partner Identification Number every time you are appointed partner in a LLP, once this number is allotted it would be used in all the LLP’s in which you will be appointed as partner.

Digital Signature Certificate:

All the forms like e Form 1, e Form 2, e Form 3 etc. which are required for the purpose of incorporating the LLP are filed electronically through the medium of Internet. Since all these forms are required to be signed by the partner of the proposed LLP and as all these forms are to be filed electronically, it is not possible to sign them manually. Therefore, for the purpose of signing these forms, at least one of the Designated Partner of the proposed LLP needs to have a Digital Signature Certificate (DSC).

The Digital Signature Certificate once obtained will be useful in filing various forms which are required to be filed during the course of existence of the LLP with the Registrar of LLP.

LLP Name:

Ideally the name of the LLP should be such which represents the business or activity intended to be carried on by the LLP. LLP should not select similar name or prohibited words.

LLP Agreement:

For forming an LLP, there should be agreement between/among the partners. The said Agreement contains name of LLP, Name of Partners and Designated Partners, Form of Contribution, Profit Sharing Ratio, and Rights and Duties of Partners.

In case no agreement is entered into, the rights and duties as prescribed under Schedule I to the LLP Act shall be applicable. It is possible to amend the LLP Agreement but every change made in the said agreement must be intimated to the Registrar of Companies.

Registered Office:

The Registered office of the LLP is the place where all correspondence related with the LLP would take place, though the LLP can also prescribe any other for the same. A registered office is required for maintaining the statutory records and books of Account of LLP. At the time of incorporation, it is necessary to submit proof of ownership or right to use the office as its registered office with the Registrar of LLP.

Difference between/among a Company, Partnership firm and an LLP:

Features

Company

Partnership firm

LLP

Registration

Compulsory registration with the ROC. Certificate of Incorporation is conclusive evidence.

Not compulsory. Unregistered Partnership Firm won’t have the ability to sue.

Compulsory registration required with the ROC

Name

At the end of the name word “limited” of the name of a public company, and “private limited” with a private company.

No guidelines.

Name to end with “LLP” Limited Liability Partnership”

Capital contribution

Private company should have a minimum paid up capital of lakh and Rs. 5 lakhs for a public company

Annual statement of accounts and solvency & Annual Return has to be filed with ROC

Audit

Compulsory, irrespective of share capital and turnover

Compulsory

Required, if the contribution is above ? 25 lakhs or if annual turnover is above ? 40 lakhs.

How do the bankers view

High creditworthiness, due to stringent compliances and disclosures required

Creditworthiness depends on goodwill and credit worthiness of the partners

Perception is higher compared to that of a partnership but lesser than a company.

Dissolution

Very procedural. Voluntary or by Order of National Company Law Tribunal

By agreement of the partners, insolvency or by Court Order

Less procedural compared to company. Voluntary or by Order of National Company Law Tribunal

Whistle blowing

No such provision

No such provision

Protection provided to employees and partners who provide useful information during the investigation process.

Advantages of LLP:

The first LLP was registered on 2nd April, 2009 and till 25th April, 2011, 4580 LLPs were registered. This form of Organisation offers the following benefits:

1. The process of formation is very simple as compared to Companies and does not involve much formality. Moreover, in terms of cost, the minimum fee of incorporation is as low as f 800 and maximum is f 5600.

2. Just like a Company, LLP is also body corporate, which means it has its own existence as compared to partnership. LLP and its Partners are distinct entities in the eyes of law. LLP is known by its own name and not the name of its partners.

3. An LLP exists as a separate legal entity different from the lives of its partners. Both LLP and persons, who own it, are separate entities and both function separately. Liability for repayment of debts and lawsuits incurred by the LLP lies on it and not different from the lives of its partners, the owner. Any business with potential for lawsuits should consider LLP form of organisation and it will offer an added layer of protection.

4. LLP has perpetual succession. Notwithstanding any changes in the partners of the LLP, the LLP will remain the same entity with the same privileges, immunities, estates and possessions. The LLP shall continue to exist till it is wound up in accordance with the provisions of the relevant law.

5. LLP Act 2008 gives an LLP flexibility to manage its own affairs. Partners can decide the way they want to run and manage the LLP, as per the form of LLP Agreement. The LLP Act does not regulate the LLP to large extent rather than allows partners the liberty to manage it as per their agreement.

6. It is easy to join or leave the LLP or otherwise it is easier to transfer the ownership in accordance with the terms of the LLP Agreement.

7. An LLP, as legal entity, is capable of owning its Separate Property and funds. The LLP is the real person in which all the property is vested and by which it is controlled, managed and disposed off. The property of LLP is not the property of its partners. Therefore, partners cannot make any claim on the property in case of any dispute among themselves.

8. Another main benefit of incorporation is the taxation of a LLP. LLP is taxed at a lower rate as compared to Company. Moreover, LLP is also not subject to Dividend Distribution Tax as compared to company, so there will not be any tax while you distribute profit to your partners.

9. Financing a small business like sole proprietorship or partnership can be difficult at times. An LLP being a regulated entity like company can attract finance from Private Equity Investors, financial institutions etc.

10. As a juristic legal person, an LLP can sue in its name and be sued by others. The partners are not liable to be sued for dues against the LLP.

11. Under LLP, only in case of business, where the annual turnover/contribution exceeds Rs. 40 lakh Rs. 25 lakh are required to get their accounts audited annually by a chartered accountant. Thus, there is no mandatory audit requirement.

12. In LLP, Partners, unlike partnership, are not agents of the partners and therefore they are not liable for the individual act of other partners, which protects the interest of individual partners.

13. As compared to a private company, the numbers of compliances are on a lesser side in case of LLP.

Disadvantages of LLP:

The major Disadvantages of Limited Liability Partnership are listed below:

1. An LLP cannot raise funds from Public.

2. Any act of the partner without the other may bind the LLP.

3. Under some cases, liability may extend to personal assets of partners.

4. No separation of Management from owners.

5. LLP might not be a choice due to certain extraneous reasons. For example,, Department of Telecom (DOT) would approve the application for a leased line only for a company. Friends and relatives (Angel investors), and venture capitalists (VC) would be comfortable investing in a company.

6. The framework for incorporating a LLP is in place but currently registrations are centralized at Delhi.